As someone said above Mercedes TD engine in a Z!
Get yourself an om603.961, the 3liter, or like i have in my G om603.971, 3.5liter(rodbender, apperantly, min hasn't). Modify the pump with larger elements and get yourself a bigger turbo. Job done. On second thought you wanted MPG, leave it original.... modifying leads to more power end less MPG
You can use almost any mercedes manual gearbox from the 80/early ninties. The engine and the head is aluminium and the dimentions of the engine are very similar to the L engine. tonnes and tonnes of tourqe.
Someone mentioned something about reliability of european cars/engines...... Italians and the Brits are responsible for the bad reputation of European cars. The Germans are incapabel of doing something halfassed, it makes no sense, at all, to claim that American engines and cars in general are of better quality than anything out of Germany. I am sorry, i could not let that pass
Funny to see someone want to make a diesel Z. apart from it being the fuel of the devil that is cool i will NEVER do it myself, but this being hybridz and all, good luck
Merry Christmas